Corporate and Securities Litigation

The federal courts have continued to tighten the pleading requirements for federal securities fraud cases, with the result that an increasing number of cases are now dismissed each year for failure to meet those requirements, as set forth in the Private Securities Litigation Reform Act. Oddly, however, the companion discovery stay provision of the PSLRA has not been strictly enforced in a similar manner, despite the PSLRA’s requirement that a plaintiff plead specific facts based on actual knowledge and not on knowledge acquired through discovery.

The PSLRA discovery stay provides that “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.” 15 U.S.C. §78u-4(b)(3)(B). In passing this provision, Congress sought to prevent plaintiffs from conducting fishing expeditions for evidence and to stem the extraordinary costs of discovery and settlements for claims that could not withstand dismissal. The legislative history leaves no doubt that the discovery stay provision was intended to be a complete stay absent some “exceptional circumstance” requiring limited discovery to preserve evidence or prevent undue prejudice.¹